New Zealand's Ministry of Foreign Affairs and Trade has received a proposal from the Papua New Guinea government for the use of $NZ3 million earmarked for Manus Island.
The New Zealand Prime Minister Jacinda Ardern designated the money last November to help the PNG government and other agencies meet additional needs on Manus while refugees remained there.
About 600 refugees are still on the island where they have been exiled by Australia since 2013.
In a statement, a ministry spokesperson said the proposal was received late last month and was now being discussed with the PNG government.
The statement did not explain what the proposal involved but said the ministry "would need to agree the use and management of the funds with PNG".
"New Zealand's funding assistance was always envisaged to be able to be drawn upon, if and when needed," the spokesperson said.
A contribution of $NZ250,000 had already "been made to the International Committee of the Red Cross for its PNG programme", they said.
In December, a ministry deputy secretary, Jeff Langley, told a parliamentary select committee the ministry was talking to the PNG government to identify needs created by the refugee population on the island.
Mr Langley suggested the money could be used to improve the island's hospital.
"There are medical needs being met within the new transitional facility, but there are also some people being referred to the local medical centre," Mr Langley said.
"Some of that [money] may also benefit other people on the island and in some ways that is probably not a bad thing."
Both the United Nations refugee agency and Amnesty International have this year highlighted technical and staffing inadequacies at the Manus Island hospital as well as its inability to properly care for the refugee population.
The refugees currently live under curfew in three facilities in the island's Lorengau town.
In February, the acting mayor of Lorengau, Kakau Karani called for the hospital to be upgraded to an international standard.